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Rethinking fiscal rules in resource-rich economies

Author

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  • Garcia-Villegas, Salomon
  • Heresi, Rodrigo

Abstract

We study the welfare and macroeconomic implications of simple and implementable fiscal policy rules in commodity-dependent economies, where a large share of output, exports, and government revenues depends on exogenous and volatile commodity prices. Using a multi-sector New Keynesian model estimated for the Chilean economy, we find that the welfare-maximizing fiscal policy involves an actively countercyclical response to the tax revenue cycle and an acyclical response to the commodity revenue cycle. Compared to a benchmark acyclical policy, the optimized rule reduces macroeconomic (GDP growth) volatility while delivering welfare gains of 0.6% of lifetime consumption for the average household (1.2% for hand-to-mouth households). Government consumption and especially public investment are particularly helpful in stabilizing GDP, while targeted social transfers are essential to smooth the consumption of financially constrained households. Implementing the optimized rule requires moderate additional volatility (fiscal activism) in government spending and public debt.

Suggested Citation

  • Garcia-Villegas, Salomon & Heresi, Rodrigo, 2026. "Rethinking fiscal rules in resource-rich economies," Journal of Development Economics, Elsevier, vol. 181(C).
    • Handle: RePEc:eee:deveco:v:181:y:2026:i:c:s0304387826000131
    DOI: 10.1016/j.jdeveco.2026.103730
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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